News of the termination of Amaron's agreement with Johnson Controls has peeved investors. (Naveen Kumar Saini/Mint)
News of the termination of Amaron's agreement with Johnson Controls has peeved investors. (Naveen Kumar Saini/Mint)

Shareholders fear Amara Raja may lose pace after ending Johnson tie-up

  • Analysts are concerned that whether the Amara Raja-Johnson split will lead to entry of another strategic buyer without an open offer
  • There are also questions on whether Amara Raja can seize the opportunity presented by lithium-ion batteries, as Exide has done

Mumbai: Amara Raja Batteries Ltd’s stock fell 6% over the last two trading sessions on news that it has terminated its shareholder agreement with Johnson Controls International Plc., its technology partner since 1997. The sharp fall in the stock came even as Indian equity markets scaled record highs this week.

The company tried to allay fears of any adverse impact on growth prospects, but investors are still worried.

Amara Raja has done well in terms of growth in automotive and telecom batteries. However, all of a sudden the future is shrouded with uncertainty.

The termination of the agreement with Johnson Controls is a fallout of the Irish firm’s sale of its power solutions business to global investment firm Brookfield Infrastructure Partners Lp. Thereafter, Amara Raja promoters increased their stake to 28% by acquiring 2% from Johnson Controls, which will continue to hold 24% shares in the company.

This leaves many questions unanswered. Will Amara Raja continue to have a technological association with Brookfield’s power solutions business? How would Johnson Controls’ 24% stake in the company impact future growth and be perceived by investors? Some analysts are concerned whether this will open up an opportunity for another strategic buyer to enter without triggering the open offer clause set by the Securities and Exchange Board of India (Sebi).

The country’s auto sector is faced with challenges of new emission norms and issues facing the planned roll-out of electric vehicles. Last year, Exide Industries Ltd announced a joint venture with a Swiss firm for building lithium-ion batteries and providing energy storage systems, targeting the electric vehicle market and grid-based applications. Now, there are concerns whether Amara Raja will remain at the cutting edge of technology.

The company has done well with Johnson Controls’ technology assistance. “While the industry structure largely remains a duopoly, Amara Raja has emerged as a formidable challenger to leader Exide, with a market leadership in telecom (55% share as of 3QFY19) and uninterrupted power supply (32-35%) segments, and a fast gaining share in autos," according to Motilal Oswal Securities Ltd.

Its ability to stay abreast of technology and churn out profits while garnering market share have aided rich valuations. However, uncertainty could cap upsides in the near term. “We are factoring in the uncertainty over Amara Raja’s future technical capabilities and are revising down its price-earnings ratio to 18 times forecasted earnings for the 12-months till Q1FY21, from 22 times earlier, even as Exide trades at 22 times Q1FY21 earnings forecast," according to an Edelweiss Securities Ltd report.

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